Patent Box: how to de-risk your position

Patent Box is a valuable relief for innovative businesses, offering an effective lower rate of Corporation Tax on qualifying intellectual property (IP) profits.

But it is also an area of growing HMRC focus. Businesses are being encouraged to provide more supporting information and calculations alongside their returns. Where this information is not available, there is a greater likelihood of follow-up questions or formal checks, including enquiry.

Fear of a compliance check should not be a reason to avoid claiming Patent Box. It does after all exist to reward businesses for their investment in IP. Businesses should, though, consider their methodology and be ready in the event of any future enquiries from HMRC. Here’s how.

HMRC increasing scrutiny on Patent Box claims

Historically, Patent Box hasn’t been a significant area of focus for HMRC. But several developments suggest that this could change.

Guidelines for Compliance 9 (GfC9) – Patent Box 

In 2024, HMRC published guidance for companies on how to ensure their Patent Box calculations are correct. GfC9 sets out HMRC’s expectations for companies which are benefiting from Patent Box. It also includes a list of what HMRC sees as common mistakes that companies make when calculating their Patent Box deductions.

HMRC ‘nudge’ letters

We are aware that HMRC has recently started to send ‘nudge’ letters to businesses that have included a Patent Box deduction in their tax computation. Nudge letters are not the same as a formal enquiry, but might say:

“we can see you have included a deduction for Patent Box in your computation… please ensure it is correct… we suggest you refer to GfC9 if you have not already done so.”

Tax computations and CT600s

Currently, the only place that Patent Box is disclosed in the Corporation Tax submission, is through the inclusion of the Patent Box deduction in the tax computation. There is currently no formal requirement to submit accompanying calculations or a report, nor is there a specific box to complete. We understand, however, that HMRC is considering making it mandatory to submit additional information to support the calculations, or revising the CT600 to require a specific disclosure for Patent Box.

Why HMRC is increasing scrutiny

While none of these developments represent a change in legislation, they do signal a change in HMRC’s expectations of taxpayers who are benefiting from what HMRC perceive to be a generous relief.

As a result, it is reasonable to expect an increase in HMRC enquiries into Patent Box calculations in the not-too-distant future. This mirrors our experience of what we have seen from HMRC’s enquiries into R&D tax credit claims.

What does this look like?

Patent Box enquiries are likely to resemble R&D enquiries, focusing on what development was undertaken, by whom and how this links to the income and expenditure attributed to the IP profit stream.

One area highlighted by HMRC as being prone to error in GfC9 is the calculation of IP profits. This relies on judgment and as a result is open to error.

Accordingly, businesses are encouraged to get on the front foot and ensure that they hold strong supporting records to justify calculations and methodology.

Patent Box enquiries

ForrestBrown has a strong track record of supporting clients who have typically prepared the claim themselves or used another provider, through R&D enquiries. That experience indicates several principles directly transferable to Patent Box.

The first is that businesses that do not provide supporting information are more likely to face further questions or a formal compliance check. Both GfC9 and HMRC’s nudge letters strongly recommend that supporting information is submitted with the tax computation.

To help mitigate risk, businesses should provide appropriate supporting calculations when submitting a Patent Box claim. This can help to reduce the likelihood of enquiry and speed up processing should HMRC open a compliance check.

What you should do

Businesses often approach Patent Box as a calculation exercise, rather than a defensible position built on evidence, systems and methodology. Given the increased potential of a compliance check though, it is important to partner with a trusted adviser that can ensure robust, evidenced and enquiry-ready claims.

We adopt as standard a five-step process to help ensure that your claim stands up to scrutiny:

• Build evidence early. Document development activity as it happens and avoid reconstructing evidence years later.
• Substantiate qualifying development Clearly demonstrate the company’s role in creating or enhancing IP. Evidence who did the work, and where.
• Track and trace R&D expenditure Align R&D costs with IP streams and separate unrelated activity.
• Develop a consistent methodology Robust approach to income attribution, expense allocation and nexus calculations.
• Understand ownership and structure Clarify who owns, manages and exploits IP within the group. Then ensure alignment with Patent Box eligibility requirements.

We believe that if these five steps are adhered to, then your risk of enquiry will reduce as you will have a robust and defendable position that will stand up to HMRC scrutiny.

Lessons learned from R&D tax

We know from supporting businesses through R&D tax credit enquiries that it pays to be prepared. While some HMRC enquiries are triggered through known risk factors, others are determined through random sampling. If your business is selected at random, then you will reduce the time, stress and disruption associated with a formal compliance check by having a robust audit trail.

How ForrestBrown can help

Drawing on our deep experience supporting businesses facing HMRC enquiries into R&D tax relief claims, ForrestBrown is the ideal partner to help prepare robust Patent Box claims for your business.

We will help you to:

• Build audit-ready documentation to support Patent Box deductions.
• Develop a clear, repeatable methodology for IP income and cost allocation.
• Align R&D evidence with Patent Box calculations.
• Integrate Patent Box into existing tax processes and commercial discussions.

By being proactive and partnering with one of the UK’s most trusted reliefs and incentives advisers, you will reduce your risk of challenge and increase your confidence in the Patent Box claim process.